Vanderbilt University wants out of the managed-care business, where losses have limited the university's research money.
In opening itself to selling its three HMOs, known as Vanderbilt Health Plans, to the HMOs' management team, Vanderbilt is following the path of many hospital systems and physician groups whose ill-fated attempts at running their own managed-care plans have hurt their ability to deliver care.
The three plans lost about $25.7 million in 1998 on revenues of about $139 million, according to figures from the university and the Tennessee Department of Commerce and Insurance.
"Certainly (the plans have) been a drain on resources," said Phil Hertik, co-chairman of the managed-care plans' board of directors. "Any time you have to fund those losses, it has to affect something."
Vanderbilt spokesman Joel Lee said the health plans' losses impaired Vanderbilt's ability to plow capital back into research programs.
The university operates 581-bed Vanderbilt University Medical Center, Nashville.
Vanderbilt decided to sell the plans last fall and has been open to offers since then. So far the only bid has come from the HMOs' management team.
Hertik and Michael Bailey, the plans' executive vice president and chief operating officer, have crafted a buyout proposal on which Vanderbilt officials are expected to act by early next year.
Hertik, former chairman and chief executive officer of managed-care company Coventry Corp., came to Vanderbilt's managed-care plans last November as a consultant. Since April he has been co-chairman of the plans' board of directors.
He declined to disclose the amount his group has offered for the HMOs but said the group would likely try to solicit financing from a private equity firm.
Not-for-profit Vanderbilt runs the plans as a for-profit subsidiary.
"There is clearly a distinction between the business orientation as a provider vs. the business orientation you have as a managed-care organization, and to be successful in either of those you have to be very focused," Hertik said. "I do think that the management group here has the ability to be very focused, and providing that focused intensive management will get the rest of the turnaround accomplished."
The group has already succeeded in cutting the managed-care plans' operating losses in half for the first six months of 1999, compared with the first six months of 1998, Hertik said.
When Vanderbilt got into the HMO business in 1994, there was concern that the hospital might be left out in the cold as outside HMOs began to carve up the market.
"One solution to the problem was to grow your own plan and go out and market it," Lee said. "From a strategic standpoint, the reasons for having provider-owned health plans have diminished over time."
Vanderbilt's first HMO, VHP Community Care, serves about 12,000 Medicaid recipients under Tennessee's TennCare Medicaid managed-care program. It lost $200,000 last year on total revenues of $18.2 million, according to figures from Tennessee's Department of Commerce and Insurance.
In 1995, Vanderbilt began its commercial insurance program, Health 1-2-3, which has about 50,000 enrollees. That plan lost about $14.5 million on premium revenues of $69.6 million in 1998, according to state figures.
In 1996, Vanderbilt started its Medicare plan, Health 1-2-3 Platinum, which has about 14,000 enrollees. It lost $6.6 million on premium revenues of $51 million in 1998, state figures show.
Vanderbilt officials expect to reach final terms with the management group sometime during the first quarter of 2000, Lee said.